The federal government’s mounting fiscal trouble is rapidly spilling over onto our commercial banks. In the past year they have increased their holding of Treasurys* by 25.7 percent. Commercial banks have bought up $777 billion worth of federal-government debt, putting federal debt at 18.3 percent of total bank assets.
As Figure 1 reports, the rise in debt purchases has been substantial. In terms of asset share, Treasurys topped 20 percent in the early 1990s, but the reason back then was a crunch in household credit as high interest rates coincided with a recession. Today, household credit is cheap and should outperform government debt as share of commercial-bank asset portfolios. That, however, is not happening:
Early on during the artificial economic shutdown last year, banks bought big chunks of Mortgage-Backed Securities. As the year went on and the U.S. Treasury kept pumping out new debt, the banks started purchasing “general” debt as well. As explained in Figure 2, the general-debt share accelerated over the course of the year and now stands at about one third of the federal debt in commercial-bank portfolios:
The rapid increase in commercial-bank ownership of U.S. debt is troubling for two reasons:
- Banks do not make much money on federal debt, especially not the general debt. As they buy more of it, they have to compensate their portfolios with higher-earning commercial assets, thus exposing themselves to higher risk of defaults.
- A debt crisis in the federal government will rapidly spread to the commercial banks, with system-wide consequences for our banking industry and our very monetary system.
In short: until Congress reverses course on its massive deficit spending, our economy is en route to a massive debt crisis with very serious macroeconomic consequences.
*) The spelling “Treasurys” is deliberate. The conventional “Treasuries” technically refers to “Treasury departments”; the spelling used here is an umbrella term for Treasury bills, notes and bonds.